A Model of a Double Standard Exchange Rate System
AbstractIn this paper I propose a "double standard" fixed exchange rate system which will be shown to have a higher expected lifetime than a conventional fixed exchange rate system. I present a simple variant of the classic Flood-Garber-Krugman model where the domestic currency is pegged to one of the two foreign currencies, depending on which exchange rate is lower; intuitively, this system thus corresponds to a gradual inflation stabilization program which will start at a future time that is determined by the foreign exchange market instead of the government. This type of a conditional peg implies that the domestic money holdings have a higher expected return as compared with the standard fixed exchange rate system. Since at each period there is a non-zero probability for the appreciation of the domestic currency, the demand for it is thus higher which decreases the probability of a speculative attack and increases the expected lifetime of the fixed exchange rate.
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Bibliographic InfoPaper provided by University of Liverpool Management School in its series Research Papers with number 2003_05.
Length: 10 pages
Date of creation: 20 May 2003
Date of revision:
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Postal: Management School University of Liverpool, Chatham Street, Liverpool, L69 7ZH, Great Britain
Phone: +44(0)151 795 3108
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Web page: http://www.liv.ac.uk/management/
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speculative attacks; fixed exchange rates;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
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